SSANGYONG STRIKE'S END UNLIKELY TO FORESTALL

C O N F I D E N T I A L SEOUL 001282

SIPDIS

STATE PLEASE PASS USTR FOR CUTLER AND TRICK
STATE PLEASE PASS PRESIDENTIAL AUTO TASK FORCE

E.O. 12958: DECL: 08/12/2019
TAGS: ECON EIND ETRD KS
SUBJECT: SSANGYONG STRIKE'S END UNLIKELY TO FORESTALL
COLLAPSE

Classified By: Economic Minister-Counselor Gregory S. Burton.
Reasons: 1.4(b) and (d).

1.(SBU) Summary: A 77-day occupation of the Ssangyong Motor
Company by laid-off workers ended under police
pressure on August 6. The noisy climax developed gradually
from the January filing for court receivership
of the company, the majority of which is owned by China's
Shanghai Automotive Industry Corporation (SAIC).
The filing was necessitated because the company was damaged
by a liquidity crisis in the last quarter of 2008
due to the global credit crunch and a sharp decline in sales.
Its court-appointed managers met with creditors
on May 22, but failed to reach agreement on the company's
proposed restructuring plan, which included asset
sales and layoffs totaling 37 percent of Ssangyong's total
workforce. Nearly one thousand workers slated for
lay-offs took over the company's only plant, preventing
Ssangyong's remaining employees from returning to work.
Clashes between striking workers and current employees
resulted in scores injured. During a five-week stand-off,
police sealed off the factory and gradually increased
pressure, forcing the remaining 458 holdouts to end the
occupation on August 6.


2. (SBU) Summary continued: Ssangyong has until September 15
to submit a restructuring plan, but the bankruptcy
court has ordered another audit to assess the effect of the
strike on the company's viability. While all of
Korea's auto firms faced difficulties during the financial
crisis and global slowdown, the ROKG limited its auto
sector assistance to policies aimed at boosting domestic
consumption and providing liquidity to financing companies
and parts suppliers. Industry analysts remain pessimistic
regarding Ssangyong's chances for survival. Ssangyong's
failure would have substantial ripple effects on its
approximately 1,300 vendors, which employ tens of thousands
of workers. Ssangyong's collapse may also reinforce Korean
fears regarding Chinese investment, especially with regard
to technology transfer and Korea's potential loss of national
competitiveness to China. The climactic events of late July
and early August increased the media focus on the case and
the stakes for the ROKG to address at least the consequences
of the firm's bankruptcy. End Summary.

Ssangyong on the Brink with Limited ROKG Intervention


3. (SBU) Ssangyong Motor Company, Korea's fifth largest
carmaker, has become Korea's biggest corporate casualty of
the global recession. The company faced a liquidity crisis
starting in the last quarter of 2008 due to the global credit
crunch and a sharp decline in sales. The automaker, which
specializes in SUVs, experienced a net loss of
almost 710 billion won (USD 511 million) in 2008.
Ssangyong's Chinese parent company, SAIC, refused to provide
additional funding unless workers agreed to massive job cuts.
The labor union balked and threatened to strike.
With few other options, Ssangyong filed for court
receivership in January. Its court-appointed managers met
with creditors at the Seoul Central District Court on May 22,
but failed to reach agreement on the company's proposed
restructuring plan, which included asset sales and layoffs
totaling 37 percent of Ssangyong's total workforce.
(Job cuts are considered crucial to securing creditor
approval of any restructuring plan). At this stage, nearly
one thousand workers took over the company's only plant in
what turned out to be a 77-day standoff that cost the company
USD 250 - 300 million. The company's domestic and export
sales in the first half of 2009 amounted to about 13,000
vehicles, a 73.9 percent drop year-on-year compared to an
average drop of 15-20 percent for Korea's other carmakers in
the same period.


4. (SBU) While conditions have begun to improve, Korea's
other automakers (Hyundai, Kia, GM Daewoo and
Renault-Samsung) all faced their own share of difficulties
due to the global recession, albeit to a lesser
degree. These companies cut production, idled plants, laid
off workers, and cut wages and benefits. Hyundai
cut spending by 20 percent, downsized its research and
development staff for the first time since the Asian
financial crisis, decreased output of larger vehicles in
favor of expanded production of compact cars, retooled
assembly lines to produce various models on the same line,
cut global production by 35 percent, and reduced
domestic output by 25-30 percent in the first quarter. All
of Hyundai's overseas plants, with the exception of


those in China, experienced layoffs or reduced work
schedules. GM Daewoo, Korea's third largest carmaker, also
faced a liquidity crisis during the first and second quarters
which stemmed from massive losses on its currency
hedging contracts. The company negotiated a 90-day rollback
on payments of half of its contracts (USD 400
million worth),which provided temporary relief, and GM
Daewoo hopes to conclude by the end of August talks
with Korea Development Bank (which has a 28 percent stake in
the company)on long-term funding requirements
for new car development and restructuring.


5. (SBU) The Korean government, for its part, has limited
its auto sector assistance to policies aimed at
boosting domestic consumption by reducing taxes and providing
liquidity to financing companies and parts
suppliers. Frustrated with what it sees as the willful
blindness of labor unions to the problems automakers
are facing in the current economic climate (i.e. labor unions
demanded a freeze in job cuts, a 4.9 percent
raise in pay, minimum wage guarantees, etc. despite the steep
drop in global demand),the government threatened
to discontinue the 70 percent reduction in taxes (up to 2.5
million won) for replacing older cars with newer
models, set to expire at the end of the year, if there is no
progress in labor-management relations and
restructuring efforts by automakers. This tax cut, combined
with a 30 percent reduction in the individual
consumption tax which expired on June 30, resulted in an
average 46.2 percent year-on-year increase in domestic
auto sales in June, the best sales month so far this year for
both local automakers and importers, including
Ford.

Ssangyong Restructuring Plagued by Labor Union Inflexibility



6. (SBU) Ssangyong's court receivership filing came about
when SAIC failed to rectify Ssangyong's financial
problems in early January, providing the company with only
USD 45 million (versus the USD 224 million
Ssangyong estimated was needed to pay back its creditors).
SAIC refused to supply the rest of the funds
unless Ssangyong's labor union agreed to a restructuring plan
that included a job cut of 3,000 out of approximately 7,000
total employees. The union rejected the plan and threatened
not only to strike, but also to sue SAIC for
illegal technology transfers and for failing to invest 1.2
trillion won as originally promised. SAIC estimated in
November 2008 that its 51 percent stake had almost halved in
value to USD 271 million. (SAIC invested USD 500
million for a 49 percent stake in Ssangyong in 2004.) Under
court receivership, SAIC has relinquished management control
over Ssangyong, but still retains ownership of the company.
The court appointed two Korean managers to
oversee the restructuring process. Should restructuring
fail, the company will be liquidated or a new owner
will be sought through a merger and acquisition process, as
was undertaken with Kia in 1998 when it became a Hyundai
affiliate.


7. (SBU) On May 22, Ssangyong stakeholders, including
creditors and shareholders, met with court-appointed
managers at the Seoul Central District Court, but rejected
management's proposed restructuring plan. Ssangyong
was ordered to submit a new plan by September 15. The
company planned to pursue sales of idle assets, relocate
its Seoul offices, request a 250 billion won loan from Korea
Development Bank, and lay off 2600 workers (1,670
of whom have already accepted voluntary retirement),but its
prospects for survival looked increasingly dim as
800-1200 workers and others, including members of the Korean
Confederation of Trade Unions (KCTU),occupied the company's
sole factory on May 22. Management responded by shutting down
the factory and threatening police action against the illegal
occupants, but also tried dialogue when police initially
signaled reluctance to intervene
in the dispute.


8. (SBU) On June 26, Ssangyong's managers presented the
striking workers with a final arbitration offer -- 450
workers were to receive severance packages, 200 were to be
placed on leave without pay status until 2012, and
the remaining 320 were to be rehired by affiliated companies
or given sales jobs. The union promptly rejected
this offer. Some 3000 of Ssangyong's remaining employees had
made several attempts to return to work after

June 16, but were largely unsuccessful. Striking workers
armed themselves with steel pipes and injured 80 people
in a 32-hour standoff which ended on June 27. Ssangyong
obtained a court injunction on July 1 to stop the
occupation of the plant. Police took up positions and
gradually increased pressure throughout July and early
August. More than half the strikers voluntarily left, but 458
continued to occupy the paint facility at the
plant to the end.

Strike's Dramatic End Still Leaves Ssangyong Battered



9. (SBU) On August 4, riot police began what turned out to be
a 3-day operation to force the remaining strikers
to vacate. Using cranes, helicopters, and liquid tear gas,
they tightened the cordon around the occupiers, who
fought back with slingshots, Molotov cocktails, and burning
tires. Police bottled the remaining workers up inside a
single building within the factory. Nearly 50 policemen and
16 workers were injured in the operation. Talks between labor
and management resumed on August 6 and by late afternoon of
that day agreement on the broad framework for a layoff plan
had been reached. That plan calls for lay-offs of only 52
percent of the occupying workers with the
rest to be put on unpaid long-term leaves of absence, a much
weaker outcome for labor than the June 26 proposal
the union rejected. Criteria by which workers will be
identified for termination have not yet been defined.


10. (SBU) Creditors representing 600 suppliers filed for the
company's liquidation in Seoul Central District
Court on August 4, claiming Ssangyong owed them 276 billion
won (USD 225 million) and that 200,000 employees of
those suppliers had been adversely affected. The suit was
withdrawn on August 7, after the end of the occupation
of the factory. Ssangyong employees returned to work on
August 8 and 9 to clean up the plant and prepare to resume
production. Company executives said that so far no serious
damage to core facilities or equipment had been
discovered and that they would move quickly to get production
started again.


11. (SBU) Most accounts put the direct cost to Ssangyong of
the labor action at USD 259 million, although some estimates
have ranged up to USD 300 million, with total damages to the
Pyongtaek economy and Ssangyong's
suppliers as high as one trillion won (USD 820 million). The
lack of production and the negative impact of
the standoff drove Ssangyong's July sales (268 vehicles) down
98.4 percent year-on-year while other local
automakers benefited from tax cuts with average sales
increases of 46 percent year-on-year.


12. (SBU) Troubles continue to deepen for both management and
labor. Main creditor Korea Development Bank (KDB)
has turned down Ssangyong's request for USD 122.5 million to
finance development of the C200 SUV, seen as key
to the company's future viability. KDB has indicated that it
will only provide 100 billion won (USD 81 million)
for workers' severance pay and restructuring. Employee
paychecks withheld since March and retirement buyout
packages that now must be paid add more cash pressure on the
company. Gyeonggi provincial police have issued
arrest warrants for 64 union leaders and leaders of workers'
groups that supported the strike. Police also
announced they intend to seek 548 million won (USD 445
million) from the union for injuries to police officers
and damage to police vehicles and equipment.


13. (C) Industry analysts remain pessimistic regarding
Ssangyong's chances for survival. According to
Lee Suck-jae of Mirae Asset Securities, Ssangyong would not
regain its competitiveness even if it produced
at its full capacity of 200,000 units per year. (Ssangyong
sold 92,665 cars in 2008.) Moreover, the company l
acks the ability to finance long-term projects in green car
development, is losing to competition from Hyundai
and Kia in the SUV market, and has lost any possible
attractiveness for foreign investors. The court's review
of the firm's recovery plan on September 15 will be a crucial
event. If the court decides the plan is plausible,
it will convene a meeting with creditors in one or two months
to seek their acceptance. It has been widely
reported, however, that a number of ROKG officials and
creditors believe that Ssangyong is not really viable;
the revival plan is to be undertaken only with a view to

eventual sale of the company to a third party.

Ramifications for ROKG Auto Sector and Chinese FDI


14. (C) Ssangyong's failure may also have ramifications on
Chinese investment in Korea. At a January 13 event,
two Chinese officials responsible for commercial promotion at
the Chinese embassy in Seoul raised the Ssangyong
case with EMin. The officials were highly critical of the
Ssangyong union as well as the ROKG's handling of the
situation, claiming the case would end Chinese investment in
Korean companies. They attributed this to the
negative economic conditions and poor relations with the
"incredibly difficult" union. We are sure that more
recent events have only hardened this Chinese view. The
union has indeed attempted to play on nationalistic
sympathies, proclaiming that, "January 9, 2009 shall be
remembered as the day Chinese company SAIC trampled
South Korean company Ssangyong Motor." Ssangyong's collapse
could reinforce Korean fears regarding Chinese
investment, especially with regard to technology transfer and
Korea's potential loss of national competitiveness
to China. Nonetheless, as the labor action dragged on and
SAIC's involvement diminished, this aspect of the
issue receded somewhat.


15. (C) As Korea's weakest carmaker, Ssangyong appears to
stand little chance of surviving the global recession.
The highly visible labor action and police reaction have
focused attention on the ROKG's handling of the strike
and more generally on labor-management relations. Some have
raised concerns with the deleterious effects the whole affair
will have on Korea and its world standing. Ssangyong's
failure will have substantial ripple effects on its
approximately 1,300 suppliers, which employ tens of thousands
of workers. The ROKG is under pressure to intervene
to ensure that Ssangyong can be liquidated quickly or
prepared for merger/acquisition. The government has avoided
involvement thus far, however, in what analysts say is a
significant step forward in labor relations. The knock-on
effect of a Ssangyong failure threatens many thousands of
additional jobs in parts suppliers and the local economy
around the city of Pyongtaek. Already there is growing
pressure for the ROKG to declare Pyongtaek as a "special"
economic zone to help generate employment in the case of
final Ssangyong bankruptcy.


16. (C) Politically, the labor action drew only limited
support from the KCTU, from NGOs, and from opposition
political parties. In particular, the refusal of fellow KCTU
members Hyundai and GM Daewoo to launch similar
strikes is yet another signal of the weakening umbrella labor
organization. One member of the GNP National Policy
Committee in a conversation with the DCM assessed that the
Ssangyong labor action marked a turning point in the
power of unions in Korea. He believed that the
destructiveness and violence wielded by the union in the
context
of a bankruptcy scenario had alienated the broader public.
Academics have agreed and noted that the Ssangyong
strike reinforced the Korean public's growing opinion that
labor is more of a special interest group than a social
movement.
STEPHENS